Reduce pricing risk

CHERYL TEVIS11/16/2012 @ 3:11pm
Cheryl has been an editor at Successful Farming since 1979.

Dale Hadden's 2011 growing season was marred by 21 inches of rain in June, followed by drought.

The Jacksonville, Illinois, farmer had followed the fundamentals of selling between March and July, aiming to hit the high 80% of the time.

“Farmers selling corn off the combine were nicely rewarded with $8.30 a bushel,” he says. “I left $1.50 on the table.”

Hadden vowed to adjust his marketing plan in 2012. “Flexible will be the word,” he concluded.

How did it work out?

“Staying more flexible helped a little,” he says. But drought shriveled his corn.

“Yields were worse than expected,” he says. “We chopped three times more for our cattle than the norm.” His beans were saved by a 5-inch Labor Day rain.

“I wasn't as aggressive in my marketing,” he says. “I was haunted by last year. But this year's lower production limited how much I had to sell. I began by pricing what I thought would be 35% of the corn. It turned out to be 80%.”

Hadden says his greater use of options increased flexibility. “If there was a price rally, I picked up a portion of it,” he says.

But he's not alone in his frustration with his marketing strategies over the past two years.

“Early marketing is still sound,” says Moe Russell, Russell Consulting Group, Panora, Iowa. “You need to know your costs and where you have positive margins, and then take them when there's a profit. Most years, early marketing pays big dividends. When it doesn't work, everyone is critical of that concept.”

Easier said than done

Prices for the 2013 crop are being buoyed by record-high 2012 prices. The potential for continued drought will linger like the proverbial elephant in the room from now until next spring.

Farmers identify price risk as a top risk-management priority. “One of the major challenges of marketing is extreme variability in prices – not only across years, but also within years,” says Darrel Good, University of Illinois ag economist.

He says that challenge is exacerbated by another big one. “Future prices can't be anticipated with a high degree of accuracy,” he says. “Producers have a long time frame to price production.” Livestock futures contracts are available 18 months into the future, and crop contracts are available four years out.

But factors that determine prices often can't be forecast with any certainty that far into the future.

“Price-determining factors can and often do change dramatically, making the decision about when and how much to price extremely difficult,” Good says.

Good and his colleague, Scott Irwin, developed an integrated model of pricing that's intended to coax producers to go beyond the time-honored aim of “beating the market.”

“In general, producers remain very frustrated by the traditional decision-making process, and they believe they often do a poor job of pricing,” Good says.